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Your assertion that using 3-4 years of market data to project a 1 yr retirement is the same as using 130 yrs of data to project a 30-40yr retirement assumes that the cycles that are apparent over short periods, are equally apparent over long periods.

No. For 3-4 year cycles, I am saying there is not enough data to derive the next year (although, I think some research does suggest that actually some derivations could be done to a limited degree - and this is only BECAUSE we had a lot of samples of this length).

For longer periods, I am saying there is NOT ENOUGH data to decide whether 130 yrs of data tells us something about the performance of the next 35-year period.

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If that is true, you should be able to list them. If you can't list them, then the comparison is invalid.

Are you aware of any larger-scale cycles that 4-year presidential one, or unknown-number-of-years business one? Who knows what other cyclical or acyclical evens may or may not affect market performance over the next 30-40 years? Are you sure there are no prolonged bear markets that can last for 100 years? Do you have any data to back that up?

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Said another way, I know precisely why I wouldn't use 3-4 years of financial market data to make projections.

I assume it's because you've see enough of them to know they are not very predictable.

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The same is not true for longer periods.

I don't think we've seen enough of them to make this conclusion.

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Originally Posted by dex

What are the scenarios and how are they significant?

I still don't get your question. How about a 50-year bear market with deflation along the way as one of countless examples? How about (inflation - 1)% average market returns for the next 50 years? It's significant because that would ruin a portfolio or a plan derived on the premise of the past 130 years. How likely is it? I don't know - I don't enough data to tell you. Is it less than 50% likely? I don't know - I don't enough data to tell you.

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Originally Posted by dex

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Originally Posted by smjsl

There is the same number of samples and same error rate in both. In 100/30-year case and in 10/3-year case, the only difference is scale (i.e. 10 years vs 1 year). The rest is the same...

Research statistics, error rates and related topics and you will see the error in the above.

dex, I will disregard your arrogant comment and try to explain my position again in the hopes of getting a better reply with an actual explanation of what you are thinking. Since you did not say, I suspect you are thinking in the first case you have 10 times as many samples as in the second. But you don't, because your samples all have to be intervals of time 10 times larger as well.

It's analogous to the following two problems having the same number of samples and other statistical information:
(1) You have a dice with numbers 1,2,3,4,5,6. You throw it 10 times and have to predict the expected value of the next 3 throws.
(2) You have a dice with numbers 10,20,30,40,50,60. You throw it 10 times and have to predict the expected value of the next 3 throws.
Units are different but the rest is the same. Same thing with retirement problem - in one case your "dice" outcomes are measured with 1 year interval based on outcomes of 3-4 years, in the other it's measured in 35 years based on outcomes of 90-130 years.

No. For 3-4 year cycles, I am saying there is not enough data to derive the next year (although, I think some research does suggest that actually some derivations could be done to a limited degree - and this is only BECAUSE we had a lot of samples of this length).

For longer periods, I am saying there is NOT ENOUGH data to decide whether 130 yrs of data tells us something about the performance of the next 35-year period.

Are you aware of any larger-scale cycles that 4-year presidential one, or unknown-number-of-years business one? Who knows what other cyclical or acyclical evens may or may not affect market performance over the next 30-40 years? Are you sure there are no prolonged bear markets that can last for 100 years? Do you have any data to back that up?

I assume it's because you've see enough of them to know they are not very predictable.

I don't think we've seen enough of them to make this conclusion.

I still don't get your question. How about a 50-year bear market with deflation along the way as one of countless examples? How about (inflation - 1)% average market returns for the next 50 years? It's significant because that would ruin a portfolio or a plan derived on the premise of the past 130 years. How likely is it? I don't know - I don't enough data to tell you. Is it less than 50% likely? I don't know - I don't enough data to tell you.

We are talking about numbers and outcomes. "significant" means how would those events affect Firecals' survivability results.

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Originally Posted by smjsl

dex, I will disregard your arrogant comment and try to explain my position again in the hopes of getting a better reply with an actual explanation of what you are thinking. Since you did not say, I suspect you are thinking in the first case you have 10 times as many samples as in the second. But you don't, because your samples all have to be intervals of time 10 times larger as well.

It's analogous to the following two problems having the same number of samples and other statistical information:
(1) You have a dice with numbers 1,2,3,4,5,6. You throw it 10 times and have to predict the expected value of the next 3 throws.
(2) You have a dice with numbers 10,20,30,40,50,60. You throw it 10 times and have to predict the expected value of the next 3 throws.
Units are different but the rest is the same. Same thing with retirement problem - in one case your "dice" outcomes are measured with 1 year interval based on outcomes of 3-4 years, in the other it's measured in 35 years based on outcomes of 90-130 years.

A forum such as this is not the place to teach or learn statistics and the related issues.

I'll step out of your discussion now.

__________________
Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral

Are you aware of any larger-scale cycles that 4-year presidential one, or unknown-number-of-years business one?

The question was whether you can identify any such long-term cycles. The fact that you can't, means you're comparing apples and oranges, regardless of how much you wish otherwise.

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Originally Posted by smjsl

Who knows what other cyclical or acyclical evens may or may not affect market performance over the next 30-40 years? Are you sure there are no prolonged bear markets that can last for 100 years? Do you have any data to back that up?

That is your argument? That there could be 30-40 year cycles, even though we can't identify any or even think of a good reason why they should exist? That's pretty weak.

Meanwhile most of your argument still rests on the notion that every period with overlapping data should be viewed as a single observation. It' is an assumption that runs through this entire thread and is one that you've failed to defend. When asked to defend it, you've dismissed it as irrelevant, but yet it keeps popping up as a central assumption in your point of view.

I'm guessing we've already passed the point of useful discussion, so I'll follow Dex's lead and bid this thread a farewell.

Either the OP is trolling, or s/he needs to quit worrying and start enjoying things, for a number of reasons:

1. Nobody (I hope) is using FIREcalc results to go out and write a month-by-month spending plan for the next 480 months, with no possibility of changing, no thought of saying "yes, I can see that market conditions are uniquely bad, but I'm going to spend that $72K this year because darn it, I decided 22 years ago that that would be what I spend this year".

2. FIREcalc "only" covers 120 years or so. What would you like it to cover? How much further back in legal and economic history can it go before the results become totally meaningless in the 21st Century? Heck, I'm pretty skeptical about the results before the ending of the gold standard, because the world is so different today.

3. Suppose the economy does totally collapse in a way which has not been seen in the past 120 years. How can any model predict that? If you sincerely believe that that's likely, well, invest in islands, concrete, ammunition, and canned food, because any scenario worse than anything we've had in that time would probably require quite a bit of all of those. In fact, in such a scenario, I suspect that it wouldn't matter how much money you have in the bank. In a state of general economic meltdown, why do you imagine that anyone will be standing around waiting to sell your pizza or fix your elective medical problems, when they themselves will presumably also be stockpiling tuna and buckshot?

__________________Age 56, retired July 1, 2012; DW is 60 and working for 2 more years. Current portfolio is 2000K split 50 stocks/20 bonds/30 cash. Renting house, no debts.

The question was whether you can identify any such long-term cycles. The fact that you can't, means you're comparing apples and oranges, regardless of how much you wish otherwise.

If you only had 3-4 years worth of data, you could potentially miss on bull/bear market cycles because you may not have noticed them to begin with. It does not mean it's not there. It just means you did not have enough data to recognize these. My argument is that looking at 30-40 year returns requires way more than 90-130 years worth of data because just as well you don't know the larger cycles that may affect this...

You know some idea about how business cycles affect the markets BECAUSE you have more than enough experience / data with it. It's hard to say what's out there for the markets when you really don't have the data for it on the larger scale. (As an example you could look at other nation's markets, although people question whether those apply to US.)

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Originally Posted by Gone4Good

That is your argument? That there could be 30-40 year cycles, even though we can't identify any or even think of a good reason why they should exist? That's pretty weak.

You could certainly think of them and try to speculate what they are. You can imagine markets like Japanese over last 20 years times 2. You could imagine hyper inflation scenarios. You could imagine slow growth below an average inflation level. I don't want to get into reasons why some of these are valid or not valid. Point is we don't have enough data to figure out true probabilities of these events in the next 30-40 years based on available history.

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Originally Posted by Gone4Good

Meanwhile most of your argument still rests on the notion that every period with overlapping data should be viewed as a single observation. It' is an assumption that runs through this entire thread and is one that you've failed to defend. When asked to defend it, you've dismissed it as irrelevant, but yet it keeps popping up as a central assumption in your point of view.

No, my argument does not depend on this. I told you you could use a 1000 observations in the 3-4 year period just like you could use a 1000 observations in 100 year period. Scale is different. Number of observations is not. How is it central to my point of view?

1. Nobody (I hope) is using FIREcalc results to go out and write a month-by-month spending plan for the next 480 months, with no possibility of changing, no thought of saying "yes, I can see that market conditions are uniquely bad, but I'm going to spend that $72K this year because darn it, I decided 22 years ago that that would be what I spend this year".

Question is not whether you should use FIRECalc blindly. Question is how much better FIRECalc compared to your horoscope.

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Originally Posted by BigNick

FIREcalc "only" covers 120 years or so. What would you like it to cover? How much further back in legal and economic history can it go before the results become totally meaningless in the 21st Century? Heck, I'm pretty skeptical about the results before the ending of the gold standard, because the world is so different today.

All good and valid points. It's not a problem with Firecalc, it's the problem with no data to base it on.

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Originally Posted by BigNick

Suppose the economy does totally collapse in a way which has not been seen in the past 120 years. How can any model predict that?

I don't know, some models try I am sure. When you plan for future though, you have to decide whether your source of data is any good for such planning.

FIREcalc "only" covers 120 years or so. What would you like it to cover? How much further back in legal and economic history can it go before the results become totally meaningless in the 21st Century? Heck, I'm pretty skeptical about the results before the ending of the gold standard, because the world is so different today.

Exactly. Should we include the asteroid that destroyed the dinosaurs? Or maybe the impact on the markets of another ice age. Brrrr...is it getting cold in here or is it just me?

__________________“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan

If you only had 3-4 years worth of data, you could potentially miss on bull/bear market cycles because you may not have noticed them to begin with.

I'll bite, once more.

The U.S. business cycle averages about 7 years. By your reasoning, the last 30 years only has 4 independent periods by which to judge the next 7 years. We therefore shouldn't have enough information to judge the business cycle. In fact, you seem to be arguing that the past 30 years doesn't have enough information to even see it because we, after all, only have 4 data points.. And yet, I can look at the last 30 years and not only see that a business cycle clearly exists, but I can also deduce pretty accurately its average length, and severity.

Following your argument to its next step; 30 years of data is no better in forecasting a 7 year economic period than 4 years of economic data is in forecasting a single year. That is clearly not true.

The U.S. business cycle averages about 7 years. By your reasoning, the last 30 years only has 4 independent periods by which to judge the next 7. We therefore shouldn't have enough information to judge the business cycle. In fact, you seem to be arguing that the past 30 years doesn't have enough information to even see it. And yet, I can look at the last 30 years and not only see that a business cycle exists, but I can also deduce pretty accurately its average length, and severity.

If past 120 years had 4 clock-like events happening with a period of 30 years, then yes, it would raise the odds that next 30 years will looks the same way. It does not invalidate the fact that there could very well be other larger cycles in play, but regularity of the observations would certainly suggest that the nature of the markets is what you observe. Imagine you are in a market which goes up every period 5-6% as a straight line. Yes, after few observations, you would assume this is probably going to happen next time around too... but the more observations you have (whether it is measured as 1000 overlapping instead of 100 overlapping or 100 independent vs 10 independent), the more confidence you will have in your prediction.

In your example, if 30 years clearly shows to you 4 well-defined 7-year cycles, indeed you could be more confident in the prediction for the next 7 years. In reality, you might miss then a double-dip recession, a depression, or a very long expansion period (or a number of other possibilities that did not happen in this country but happened elsewhere).

I understand you are saying that at 120 year scale you see what drives the (say, 7-year) market cycles, but it does not mean you can see what drives larger cycles that affect 30-40 year spans. Miscellaneous larger events will probably affect these larger time frames (e.g. changes in rules / regulations relating to markets and to overall gov. system incl. taxation, economic expansions / contraction related to running out of resources, someone mentioned the gold standard) - point is not so much to list them as to acknowledge the fact that until we live through many of these larger events, we don't have enough data to know how larger cycles behave. Similarly, at 3-4 year scale, for example, I may notice seasonal cycles (e.g. christmas season for retail), but it does not mean it will be enough for me to know well what will happen over the course of the whole next year if all I had was 3-4 years worth of experience.

In my current job (which I am soon retiring from) I've looked into simulation modeling of our production line operation. If I use Monte Carlo calculations I'll some idea of the probability of a given state of performance of the line. However, the simulation will consider performance states that never really happen and therefore the probability of a particular state that isn't from that population is of limited value. I could also run the model using past performance data of our real production line but that is a limited data set. In the end modeling and estimation of future performance is a "best engineering knowledge" sort of thing. You do the best you can with the data you've got and plan to be flexible if things don't go the way you hoped they will go.

You also have to look at the rate of (significant) change of the system you are analyzing. Based on that time constant I put less significance to anything in particular that is very far out in time. I am pretty sure there will be a 2.0 earthquake somewhere on the planet earth in the next couple of hours. I am not all that confident there will be a 7.0 earthquake 1 mile from my house 10 years from now.

One way to use FIRECALC might be to take a contrarian point of view. See if your assumptions about your future plans have never occurred in the past. It's probably no more informative than looking at it the other way around but it might be a more psychologically conservative point of view. If you are nervous about risk and your flexibility to adjust to future events then this way of looking at things might keep you from making a decision outside your comfort zone.

You really should take a step back and listen to yourself. You sound like Chicken Little, notwithstanding your disclaimer that you are merely pointing out uncertainty, not doom.

The simple fact is that all models are wrong; some models are useful. To me, and I suspect many others, FIRECALC is useful. Is it infallible? No. Is it the only thing upon which we do or should rely? No. It is a tool, one among many, nothing more and nothing less.

You have pointed out what you believe to be a flaw in FIRECALC. But Nords' question remains -- what are you going to do about it? At some point, you either need to take that step off the ledge, or not. If you want 100% certainty about the road ahead, you will never get it.

So there it is -- either retire or don't, it makes no difference to me. But for God's sake please stop whining.

The black swan awaits us all. Doesn't mean he'll be at your door, but maybe....

In most of those instances it wouldn't have really mattered if you were retired or not. Almost everyone ended up in the soup. So if I'm impoverished in all of those situations regardless of what I do, why even consider that data in my decision making process?

In fact, if you really think one of those situations is in store for us, one of the silliest things you could do is save money. Might as well go out and blow it on whatever floats your boat before it's all rendered worthless.

The biggest concern I have with Firecalc* is that it is US-centric and that, taken as a whole, the period covered was one of economic prosperity (notwithstanding a depression of moderate length in the 1930s, a modertate period of high inflation in the 1970s and other economic fluctuations along the way up). [As I have a limited understanding of statistics, I'm happy to sit back with my popcorn, observe the debate and pretend that I understand what people are talking about on that issue.]

Fortunately Firecalc is not the only reference point we have available - we can look to other countries during the same time period and at many points in history to see a much wider range of economic conditions ranging from the extremes of total wealth confiscation or destruction (e.g. Russia 1917), very long periods of deflation (e.g. Japan 1980 - ), a decline in population (e.g. the Black Death), war (e.g. WWII), hyperinflation (e.g. most of Latin America late 20th century), over reliance on a single commodity (e.g. Chad), a wide variety of manias (e.g. tulips) etc etc etc.

It does not take a lot of effort to:

1. understand that there is a huge range of issues that can adversely impact our personal finances; and

2. accept that there is no certainty about future returns for anything (including the much touted Tips, gold or farm land, being three widely advocated safe havens from financial uncertainty**),

and to plan accordingly.

While Max Gunther's comment was on chartists, IMHO it is applicable to financial planning in general: "chaos is not dangerous until it begins to look orderly".

* This is not a criticism - Firecalc is a useful tool but it should not be the only reference point for deciding the "how much is enough question" - and I don't recall anyone claiming that it was

** I am not suggesting that ether Tips or farmland are not good investments - only that some of their advocates place too much faith in them as a complete solution for my liking

__________________Budgeting is a skill practised by people who are bad at politics.

In most of those instances it wouldn't have really mattered if you were retired or not. Almost everyone ended up in the soup. So if I'm impoverished in all of those situations regardless of what I do, why even consider that data in my decision making process?

In fact, if you really think one of those situations is in store for us, one of the silliest things you could do is save money. Might as well go out and blow it on whatever floats your boat before it's all rendered worthless.

If you think one of these situations is possible, then exporting both your savings and yourself would be a good starting point and I would still advocate saving as usual just in case the worst does not come to pass (but possibly changing the form of the savings - when society begins to collapse, having the resources to bribe people becomes important).

__________________

__________________Budgeting is a skill practised by people who are bad at politics.

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